Not so terrible times at Tesco

Sales are still sliding at Tesco (TSCO), but first-quarter results came in ahead of market expectations as a whole. Sales at the grocer's stores which have been open for at least a year fell 1.3 per cent in the first three months of the financial year, excluding fuel and VAT. That compares to a 1.8 per cent fall during the final quarter of the previous financial year, and a 1.2 per cent decline over Christmas and the New Year festive period. Like-for-like sales in the UK and Ireland fell 1.5 per cent, but that’s an improvement on the previous quarter, where sales dipped 2 per cent. Like-for-like volumes rose 1.4 per cent, while the number of transactions improved by 1.3 per cent.

The market took the latest figures well. Shares in the retailer rose 3.6 per cent in early trading, making it the biggest riser in the FTSE 100 on the morning of 26 June. But management refused to label this the “tipping point” for the gargantuan grocer. Chief executive Dave Lewis said the results were simply “a step in the right direction” as the group tries to “fix the fundamentals of shopping” at its stores.

Tesco was plunged into crisis last year after it overstated first-half pre-tax profits by £250m. A string of profit warnings then followed, culminating in a staggering loss of £6.4bn for the year to April.

Shore Capital says...

Hold. There is much to applaud in what Mr Lewis has done to bring calm and order to Tesco in a short period of time. However, he and his new management team have much work to do. Central to the eventual outcome of the work commenced by the company will be prevailing cash profit margins, ongoing capital requirements and so, free cash generation. In trying to reduce financial and operational gearing too, we see a stock with more downside resilience but little near-term catalyst for appreciation in the absence of new news. We still expect adjusted pre-tax profits of £615m this year, giving EPS of 5.8p.

Brewin Dolphin says...

Neutral. The statement is very short, but management commentary highlights that the improvements made to service, availability and lower everyday prices are having an impact with customers more likely to shop at Tesco. While these numbers are encouraging, Tesco expects continued deflation throughout the end of the year. Furthermore, the announced cost cuts are modest and further investments in pricing will reduce profitability compared to last year in our view. The balance sheet remains problematic, although the sale of assets would help reduce leverage. But management has refused to comment on the potential sale of subsidiary Dunnhumby and of the South Korean business.